In one of his finest post-Beatles numbers, John Lennon sang, “Life is what happens to you while you are busy making other plans.” It’s pithy and it’s pragmatic, but when you are writing an exit plan, it’s only half the story. Your exit plan is not just a road map for your business, both before and after you leave, it can also be a plan for the rest of your life.
So what does a robust exit plan that builds a foundation for the future look like? And how can business owners ensure that they protect the legacy they have created and provide for themselves and their families when they move into retirement or on to new challenges? There are a number of key ingredients to consider.
The first step when building an exit plan is to get an accurate valuation for the business: the unfortunate truth is that many business owners over-estimate the value of their business. The perceived value of their business may be influenced by a figure that the owner is aiming for to facilitate their future activities, be it a pension pot or start-up funding for a new endeavour.
Engaging with professional valuation expertise first is recommended to maintain objectivity
An initial shortfall between the expectation and reality of valuation does not have to be a barrier to future plans. The best way to boost the value of a business is to demonstrate potential.
Whether the aim is to pass on to family members or sell on to a third party, it is important to set out a strategy for the business. While the past performance of a business is important, it is the future performance that the buyer will ultimately be paying for.
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Although the business may normally operate a low-profit model to reduce corporation tax liabilities, the strategy in the exit plan should focus squarely on increasing profits year-on-year, as this will boost the business’ perceived value.
In this vein, the plan should also highlight opportunities for growth, whether horizontally, vertically or geographically. As well as highlighting opportunities, the business plan should also indicate the steps taken to mitigate external threats, such as reducing reliance on a small number of suppliers or one large customer.
A business with outstanding legal disputes is not going to be an attractive proposition for buyers, investors or inheritors. A good exit plan will therefore feature contingencies to resolve any outstanding legal disputes and tie up any other legal loose ends.
Of particular importance are intellectual property rights. From trademarks and patents to designs and domain names, the IP inventory should be properly protected and documented, as it could contain some of the business’s most valuable assets.
Another valuable asset is the talent within the business – key staff at both management level and further down the structure. A business will look less appealing if there is a danger that important employees in critical positions are likely to jump ship when the business changes hands.
Teamwork: An exit plan should ensure the future of the business; that means keeping key staff
It can therefore be necessary for an exit plan to contain provisions that offer key employees attractive long-term contracts to ensure that they remain on board. This is particularly true for members of the management team that may have been recruited with transition in mind. This affords a measure of continuity and assurance to the future owner.
The above points focus squarely on the business aspects of the exit plan, but the goal of such a plan is to allow the founder or owner to disengage (at least partially) from the company and move on with their life. This is where the next point comes in.
Tax, wealth and estate planning
It is never too early for a business owner to consider their tax position, and any plans to reduce the overall tax burden should be included in the exit plan. Whether it is claiming business property tax relief from inheritance tax, or deferring capital gains tax to the buyer or successor, detailed tax planning should be carried out with the help of a tax specialist.
Similarly, legal advice should be sought should it be necessary to put shares in trust for children or grandchildren. This type of estate planning will be extremely important if the exit plan is triggered by a sudden death. While it is not pleasant to dwell on such a possibility, strong planning early on can save family and business a lot of anguish at an already difficult time.
With the business in safe hands, tax affairs under control and family members cared for, the remaining aspect of the ‘life plan’ is wealth management. Are the proceeds from the business intended to support a long retirement or fund a new endeavour? Either way, the exit plan should be clear about how the proceeds should be invested to match the prevailing appetite for risk and provide security and stability for the long-term.
Ultimately, an exit plan is a road map designed to take your business on a journey that you will not be part of, but at the same time enable you to begin a new journey of your own. As with any plan, even if life does get in the way, it is important to adhere to it as far as is practically possible.
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